Bid Bonds

Why Bid Bonds Are Necessary for a Construction Project

There was a time when construction companies would issue low bids to secure a contract and either increase the price as the job progressed or refuse to complete the project because they underbid themselves and would not profit from the job.

However, in modern times, larger construction projects necessitate that a contractor or construction company submits a bid bond that assures the hiring developer that they are both serious about the job and financially capable of completing the project.

What are Bid Bonds?

As a simple definition, bid bonds are used as security for bids submitted on a contract proposal. Particularly on larger projects, such as residential or commercial developments, bid bonds are required for all bids or the bid will be rejected. This provides both confidence and financial security to the developer offering the contract.

It gives the developer confidence because they know the bond issuer, or guarantor, stands behind the work of the bidding contractor and will follow up with a performance bond if the contract is awarded. The developer obtains financial security because if the lowest-bid contractor is awarded the contract and backs out, the developer will receive the financial difference from the lowest bid to the next lowest bid.

Bid Withdrawal

Can a contractor withdraw a bid without losing the bid security? Yes, if the withdrawal happens before the actual bid opens from the developer. Sometimes the developer asking for bids will allow a bid to be retracted before it is awarded without action taken against the bidder. However, once the bidding is complete and a contract is awarded, no withdrawal is allowed without the loss of the bid security.

Who Issues Bid Bonds?

Bid bonds are a type of surety bond issued typically issued by surety or insurance companies who specialize in this type of product. Often, this type of bond is sold through an agent of the insurance company, rather than sold directly. An agent may work directly for the insurance company or be an independent agent who sells products on behalf of many different companies. In either case, the agent will have the answers on the pricing and processing of bid bonds best suited for a particular contractor or project.

Since the insurance company who issues a bid bond also promises to issue a performance bond on the contract, the processing and underwriting of the bid bond is just as strict as the performance bond. Contracting companies usually must submit the following information:

• Application — This will include the principal owner(s) contact and personal information.
• Owner's Resume — A resume helps the insurance company determine if the contractor has the experience necessary to complete the construction project.
• Business Financial Statements — Financial statements are utilized by the insurance company to determine if the company has sufficient financial backing to complete the project in its entirety.
• Owner's Personal Financial Statements — The personal finances of the owner of a construction company is also evaluated to develop an overall picture of financial soundness.

Often the surety company requires a financial indemnity from the owner or owners of the construction company in case the company fails to complete the contract or encounters financial hardships in the middle of a contract. Thus, the owner's personal financial information may be used as part of the underwriting process.